14 ms·

Wells Fargo temporarily suspending applications for home-equity lines of credit

146 points by garraeth 6y ago

fortran77 6y ago
This makes perfect sense. Why let people get deeper in debt and risk their houses?
- formercoder 6y ago
  This has nothing to do with protecting customers. People should be allowed to do, almost, whatever dumb things they want with their money. This is about protecting the bank's balance sheet.
  - brenden2 6y ago
    This is correct.
  - warranty 6y ago
    Inb4 housing market crashes again cuz its okay to let people do whatever they want.
    - WWLink 6y ago
      The products back then were totally ridiculous. For example, 5/1 interest only loans with reverse amortization. What does that mean? A normal adjustable-rate mortgage starts off with a fixed rate period, say 5 years. Then the remainder is a 25-year adjustable rate mortgage. What these guys would do is sell a 5 year loan with a balloon payment at the end. The reasoning being that "hey the market is appreciating so fast right now, you'll refinance before the loan is over anyway." Interest only loans mean that for the entire time of the loan, you're not paying any capital back, and will still owe the entire balance. So you're basically renting the property. But wait, there's more! With reverse amortization, you could pay $1000 for a $2500/mo payment and the difference would be plopped onto your balance! So people would buy a $300,000 house. Then at the end of the 5 year period they'd owe $400,000. Very common problem. Unfortunately, as those started coming due, the banks were suspicious and would no longer lend people money so easily. And the requirements to get those crazy loans were pretty lax in the first place. Brokers at the time were acting like loan sharks. And they had a like 6% incentive to do so. It was pretty out of hand on all sides of the deal. Plus there were numerous cable TV shows going on about how great it was to own a house, and tons of TV commercials talking about how easy it was to get a loan. I mean even today, people are extremely pushy about buying houses.
  - tcbawo 6y ago
    Protecting the shareholders from unnecessary risk. It's win-spin-win.
  - fortran77 6y ago
    No because then the Government/Taxpayers will be needed to bail them out, just like the 2008 crash. People who bought houses they couldn't possibly have ever afforded were given all the credit they wanted, and were bailed out by the government. (For example, they were exempted from paying income tax on forgiven debt.)
    - WWLink 6y ago
      There were some utterly ridiculous loan products available in the early-mid 2000s. The crash came because people who wanted to refinance out of those loans couldn't. Edit: Of course, they were dumb for signing up for those loans in the first place. But the brokers who sold people those loans were straight up loan sharks.
  - WillPostForFood 6y ago
    Lines of credit aren't your money though.
    - will_pseudonym 6y ago
      The repayments are.
  - ratsmack 6y ago
    >People should be allowed to do, almost, whatever dumb things they want with their money. Are you saying that a bank should make irresponsible loans for people that make irresponsible decisions?
    - formercoder 6y ago
      No. The bank should maximize shareholder value and not do that, which is what is happening. But we should let anyone write a check and invest in a startup, or buy certain products considered unsavory by the masses.
    - jklein11 6y ago
      I'm not convinced that taking out a HELOC now would be irresponsible in all cases. Let's say that you are 80% into your mortgage. You lost your job in March bc of COVID-19. Your next three mortgage payments are coming due in June and you still don't have an income. A HELOC would be a good way to push off a foreclosure. If you can't come up with those 4 months of mortgage payments you will be giving up the 60% equity you built up in your home.
- deleted 6y ago
  [deleted]
- jacurtis 6y ago
  Oh silly... Wells Fargo doesn't make these decisions to protect YOU, the consumer. They do it because it is too risky for THEM. Look at the last housing crash. The crash was caused by banks offering people loans that they knew would most likely default. They offered people more money than they could afford to pay. If the bank was looking out for your best interest they would have told millions of Americans "no" on their mortgage applications. But the bank knew that they could sell your loan off before you defaulted and make it someone else's problem. It gets more complicated than that obviously, but the crash was caused by the banks knowingly extending bad loans. The banks are looking out for themselves, not you.
toomuchtodo 6y ago
This is not unexpected. JPMC halted home equity origination a week ago. This debt is kept on a bank’s books (and not government backed like mortgages), they’re limiting exposure during macroeconomic distress. Do a cash out refi if you need to tap your equity.
- amiga_500 6y ago
  They are preparing for a drop in land prices. Also presumably anyone applying for a HELOC right now is doing so to tide them over, and banks reason that many will just burn through the debt and then default with less equity.
  - rcpt 6y ago
    We just printed $6T but the amount of land didn't change. Why would land prices go down?
    - lotsofpulp 6y ago
      It depends how much of that $6T lands in the hands of people buying land (in the near future).
    - toomuchtodo 6y ago
      Land prices are tied to wages. Wages and employment goes down, value of land goes down. Unless the Fed starts buying up land directly, or using REITs.
      - nostromo 6y ago
        > Unless the Fed starts buying up land directly, or using REITs. This is happening. The Fed is buying mortgage backed securities. In other words: the Fed is buying real estate.
    - amiga_500 6y ago
      Because much of the "value" presently seen is speculative, and there are many reasons not to be bullish for the next couple of years.
bananaquant 6y ago
Interesting. This kind of resembles the crisis of 2008, when banks have produced too many subprime loans. It looks like WF tries to get them off their books while it still can. Or at least not make new ones.
- loeg 6y ago
  Not in any way does this resemble 2008. WF is not originating new loans because essentially all consumers suddenly have terrible looking credit and WF doesn't want to take on that risk.
  - imtringued 6y ago
    Consumers have normal looking credit because the credit scores are lagging behind. It's smart to wait until the credit scores actually reflect reality instead of showing a rosy picture right before everyone starts defaulting at the same time.
    - loeg 6y ago
      I think we agree but I was less clear than I could have been in the grandparent comment. When I say "consumers suddenly have terrible looking credit," I don't mean FICO credit scores. Those remain, as you suggest and I agree, mostly unaffected, as they are a lagging indicator. Banks are not fools, however, and they understand that there is more to consumer credit risk than FICO scores, especially in this kind of turmoil and economic contraction.
brianwawok 6y ago
It's also the fun part about credit. When you don't need it, it is real easy to get. When you need it, it is real hard to get. This is why $1 in the bank is worth so much more than $1 in credit that you can maybe draw on. Especially lines of credit that can be called in.
- perlpimp 6y ago
  I wonder how much bank needs to be hurting to call in a loan / call in your mortgage to try to sell it for a fraction of a price in some unknown distant future.
  - coliveira 6y ago
    In some places in the US, not more than 2 or 3 months. That's all they need to start a foreclosure.
  - 1stranger 6y ago
    Pretty sure residential mortgages cannot be called. Edit: assuming the borrower is current.
- joeax 6y ago
  Two years ago someone I know was laid off. After a three-month climb to find a new job, they vowed to put together an emergency fund. After a sudden drop in rates, they took out a small cash-out refinance. Luckily they still have a job, but the fact that they now have that cushion puts their mind at ease. Lesson learned: take advantage of cheap credit while you can.
  - duxup 6y ago
    That seems like more of a roll of the dice.... If they're capable of paying back that refinance ... probably could have just saved. I suppose there is a little window of time where it is advantageous if they're laid off again, that seems more like random chance.
    - deleted 6y ago
ben_jones 6y ago
My parents took out a home equity loan in 2013 and are still buried by it, any recommendations here for how they can best service or refinance the loan?
- Consultant32452 6y ago
  Wait until their house is worth less than the debt. Hide their assets, bail on the house, declare bankruptcy.
  - scarface74 6y ago
    This is actually a great idea. I walked away from five underwater mortgages in 2012. I paid $1000 on a second loan during a short sale and paid 1/3 of the difference between what I owed on one after the sale. The other three I paid nothing. Three years to the day after the last short sale, we bought a brand new build in a much better area of the city with 5% down on a custom build. No bankruptcy required.
  - brenden2 6y ago
    People are downvoting you, but this is actually not a bad idea. People have been brainwashed into believing they should 1) forever be indebted and 2) always carry the burden of debt. As the saying goes: If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.
    - elliekelly 6y ago
      Banks have done an excellent job of selling the American public on the idea that creditworthiness somehow equals morality. This same advice given to a corporation would be considered by many as just what the business has to do to weather the storm.
      - brenden2 6y ago
        Well said. Profile checks out.
bdavis__ 6y ago
would you loan money into this kind of uncertainty? i think this is a very rational decision for a bank to take. (hate for the banks aside, i would do the same thing..)
- jklein11 6y ago
  For the right kind of rate and with the right collateral, you bet I would.
  - throwphoton 6y ago
    For home loans, the collateral is the house, which is strange because the house doesn't truly belong to the borrower until the loan is paid off. Deeper still, the conditions where home loans are risky are the same conditions where home prices are risky. In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K. I'm not sure the "right collateral" even exists for home loans, it's a weird case where the "collateral" is the item being purchased on credit instead of something the borrower actually has.
    - usrusr 6y ago
      Chances are the house will be worth ten millions, but those ten millions won't be much after the global corona compensation money printing spree and the 1.x million the borrower pays will be worth nothing. The borrower being forced to walk away would be a best case outcome for the bank in a high inflation scenario.
    - loeg 6y ago
      Banks generally don't extend HELOCs beyond a borrower's equity in the house, which is the fractional value of the house the borrower truly owns. They are basically a flexible cash-out second mortgage. > In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K. You've just described ordinary mortgage risk, in no-recourse states. In recourse states, the bank can go after the borrower for the remaining balance of the loan ($600k). Generally if a bank was willing to lend $1 million to someone, they had reasonably high credit and cash flow at origination time (debt-to-income ratio, non-conventional jumbo loan). They may not get their $600k back, and in no-recourse states they will get $0 back, but that is priced in to the interest rate of the loan.
jacurtis 6y ago
The significance of this announcement (and why I am assuming OP posted it), is not to let us know that we can't get home equity lines, but instead showing it as a signal that one of the largest mortgage providers in the world is worried about future home/land values. Remember that Wells Fargo is the 26th largest corporation in the world. They have plenty of money. They have lots of smart people (insert your "stupid banker" joke here) working for them. They have lots of highly-paid analysts that make these decisions. These are not spur-of-the-moment, panic-induced decisions. Wells Fargo also has a lot of experience with home values and mortgages, by being the largest Home Mortgage provider in the US (by dollar value), with $126B in home loans [1]. Long story short, they are experienced in home values and mortgages and they have a lot riding on them. They have smart people that have looked at the current and future state of home values and decided, that despite the potential revenue that could be generated from Home Equity Lines, there is too much risk in offering this product and they will stop offering it until further notice. That's a big deal. Wells Fargo is leaving lots of money on the table by NOT offering these. But their analysts have decided that it is too risky. That to me, means that there is a lot of concern over future home value. We have been living in a housing bubble for a while. We all know it, Wells Fargo knew it, and this could be a signal that at least Wells Fargo is concerned that the bubble might be popping. (I personally hate Wells Fargo, but did have a Home Mortgage through them until about 3 months ago when I sold my last home. I wouldn't borrow from them again however. This isn't a fanboy piece, but it is important to acknowledge their strengths when looking at signals like this). [1] - https://www.housingwire.com/articles/41539-here-are-the-top-10-lenders-dominating-the-mortgage-market/ https://www.housingwire.com/articles/41539-here-are-the-top-...
- tempsy 6y ago
  It’s because the government is only buying mortgage backed securities right now for conventional residential loans that don’t include HELOCs which the bank would shoulder all the credit risk for. If the government is guaranteeing one type of residential real estate loan and not the other it makes no sense for a bank to offer the one that isn’t guaranteed when they can just pursue practically risk free lending.
  - 6y ago
sigstoat 6y ago
there are alternatives to believing that the value of the entire housing market is going to drop: 1. your last N years of work/credit history are currently less predictive about future income/repayment ability than banks would like. regardless of who you are. 2. even if the same amount of money continues to chase the housing market, there is (as some other comments mention) at least a little bit of a reason to believe that the money might want to move to different geographic areas. if you don't know what that change will look like, your ability to predict future home values is reduced.
lalsdjsdlafsdk 6y ago
This is what happens when you allow fascists like Gavin Newsom to run wild. FUCK OFF AND DIE FASCIST SCUM! COVID IS A LIBERAL LIE!
heyflyguy 6y ago
Sure there is market uncertainty, but that changes qualification criteria not the willingness to lend. I wonder if this announcement has more to do with the PPP fiasco in the banking world. I applied for an SBA loan the day before the PPP was released and my bank said basically "sorry, we're doing nothing but PPP for the next 5 weeks".
toast0 6y ago
How much of this is market forces in general, and how much of it is market forces combined with Wells Fargo's balance sheet limits that it has because of past misdeeds.
omgJustTest 6y ago
While this seems drastic, consider JP Morgan did this in April [1]. I couldnt find statistics on the number of loans oustanding or the number that have drawn lines of credit. Let me know if you can. [1] https://www.americanbanker.com/news/jpmorgan-halts-home-equity-loans-due-to-coronavirus https://www.americanbanker.com/news/jpmorgan-halts-home-equi...
skybrian 6y ago
Well, that's unfortunate but understandable. It seems like the Fed should be buying up home equity loans, to offload the risk? A universal basic income would be best, but short of that, more consumer loans would be useful. And better if they only need to be paid back when you're making money.
aazaa 6y ago
This follows a similar move by JP Morgan Chase: > Due to the economic uncertainty created by COVID-19, we’re temporarily not accepting applications for new home equity lines of credit (HELOC). This will protect both you and the bank. https://www.chase.com/content/chase-ux/en/personal/home-equity/update https://www.chase.com/content/chase-ux/en/personal/home-equi... From Wikipedia: > A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. HELOC funds can be borrowed during the "draw period" (typically 5 to 25 years). ... https://en.wikipedia.org/wiki/Home_equity_line_of_credit https://en.wikipedia.org/wiki/Home_equity_line_of_credit This has two main implications: 1. Two major banks are now worried about consumer solvency (and/or real estate prices) to the degree that they're forgoing HELOC origination profits across the board. An alternative response could have been to simply raise interest rates on these loans. The fact that the loans were suspended suggests a lot more afoot than meets the eye. Those suggesting to "cash-out refi instead" may be surprised to find in the coming weeks that these loans have also been terminated, or saddled with terms that make them unattractive. 2. Consumers who were planning to tap home equity to pay for monthly expenses will not be able to do so. This could spell a lot of trouble moving forward. US consumers view their homes as a kind of ATM, dispensing dollars on demand through HELOCs. That money can be used for literally anything. Without an easy source of credit to tap, where will the American consumer turn? In increasing order of existential risk: 1. Sale of big-ticket property (houses, boats, cars, cutting short college degrees). 2. Credit cards 3. Payday loans 4. Default on other loans 5. Bankruptcy protection These options magnify bad decisions made in the past. Selling big-ticket items drives down the market price of the underlying assets, which leads to more distress, and so on. Credit cards and payday loans charge indefensibly-high interest rates that can easily lead consumers further down the ladder of insolvency. Bankruptcy filings destroy money by wiping loans off the balance sheets of banks. Banks respond by tightening lending standards, which drives the cycle further down. How will employers likely respond? 1. Hiring freezes 2. Pay cuts (nominal or real, through increased employee contributions to health care plans) 3. Bankruptcy All of these things, from stress on consumers to pressure on businesses, are deflationary. Expect the value of cash to increase compared to the value of stuff. How to approach what lies ahead? If you're in debt, get out now. Then stay out. Deflation wipes out debtors as they're forced to pay back loans with ever-appreciating dollars.

146 points by garraeth 6y ago

fortran77 6y ago

This makes perfect sense. Why let people get deeper in debt and risk their houses?

formercoder 6y ago
This has nothing to do with protecting customers. People should be allowed to do, almost, whatever dumb things they want with their money. This is about protecting the bank's balance sheet.
- brenden2 6y ago
  This is correct.
- warranty 6y ago
  Inb4 housing market crashes again cuz its okay to let people do whatever they want.
  - WWLink 6y ago
    The products back then were totally ridiculous. For example, 5/1 interest only loans with reverse amortization. What does that mean? A normal adjustable-rate mortgage starts off with a fixed rate period, say 5 years. Then the remainder is a 25-year adjustable rate mortgage. What these guys would do is sell a 5 year loan with a balloon payment at the end. The reasoning being that "hey the market is appreciating so fast right now, you'll refinance before the loan is over anyway." Interest only loans mean that for the entire time of the loan, you're not paying any capital back, and will still owe the entire balance. So you're basically renting the property. But wait, there's more! With reverse amortization, you could pay $1000 for a $2500/mo payment and the difference would be plopped onto your balance! So people would buy a $300,000 house. Then at the end of the 5 year period they'd owe $400,000. Very common problem. Unfortunately, as those started coming due, the banks were suspicious and would no longer lend people money so easily. And the requirements to get those crazy loans were pretty lax in the first place. Brokers at the time were acting like loan sharks. And they had a like 6% incentive to do so. It was pretty out of hand on all sides of the deal. Plus there were numerous cable TV shows going on about how great it was to own a house, and tons of TV commercials talking about how easy it was to get a loan. I mean even today, people are extremely pushy about buying houses.
- tcbawo 6y ago
  Protecting the shareholders from unnecessary risk. It's win-spin-win.
- fortran77 6y ago
  No because then the Government/Taxpayers will be needed to bail them out, just like the 2008 crash. People who bought houses they couldn't possibly have ever afforded were given all the credit they wanted, and were bailed out by the government. (For example, they were exempted from paying income tax on forgiven debt.)
  - WWLink 6y ago
    There were some utterly ridiculous loan products available in the early-mid 2000s. The crash came because people who wanted to refinance out of those loans couldn't. Edit: Of course, they were dumb for signing up for those loans in the first place. But the brokers who sold people those loans were straight up loan sharks.
- WillPostForFood 6y ago
  Lines of credit aren't your money though.
  - will_pseudonym 6y ago
    The repayments are.
- ratsmack 6y ago
  >People should be allowed to do, almost, whatever dumb things they want with their money. Are you saying that a bank should make irresponsible loans for people that make irresponsible decisions?
  - formercoder 6y ago
    No. The bank should maximize shareholder value and not do that, which is what is happening. But we should let anyone write a check and invest in a startup, or buy certain products considered unsavory by the masses.
  - jklein11 6y ago
    I'm not convinced that taking out a HELOC now would be irresponsible in all cases. Let's say that you are 80% into your mortgage. You lost your job in March bc of COVID-19. Your next three mortgage payments are coming due in June and you still don't have an income. A HELOC would be a good way to push off a foreclosure. If you can't come up with those 4 months of mortgage payments you will be giving up the 60% equity you built up in your home.
deleted 6y ago
[deleted]
jacurtis 6y ago
Oh silly... Wells Fargo doesn't make these decisions to protect YOU, the consumer. They do it because it is too risky for THEM. Look at the last housing crash. The crash was caused by banks offering people loans that they knew would most likely default. They offered people more money than they could afford to pay. If the bank was looking out for your best interest they would have told millions of Americans "no" on their mortgage applications. But the bank knew that they could sell your loan off before you defaulted and make it someone else's problem. It gets more complicated than that obviously, but the crash was caused by the banks knowingly extending bad loans. The banks are looking out for themselves, not you.

toomuchtodo 6y ago

This is not unexpected. JPMC halted home equity origination a week ago. This debt is kept on a bank’s books (and not government backed like mortgages), they’re limiting exposure during macroeconomic distress. Do a cash out refi if you need to tap your equity.

amiga_500 6y ago
They are preparing for a drop in land prices. Also presumably anyone applying for a HELOC right now is doing so to tide them over, and banks reason that many will just burn through the debt and then default with less equity.
- rcpt 6y ago
  We just printed $6T but the amount of land didn't change. Why would land prices go down?
  - lotsofpulp 6y ago
    It depends how much of that $6T lands in the hands of people buying land (in the near future).
  - toomuchtodo 6y ago
    Land prices are tied to wages. Wages and employment goes down, value of land goes down. Unless the Fed starts buying up land directly, or using REITs.
    - nostromo 6y ago
      > Unless the Fed starts buying up land directly, or using REITs. This is happening. The Fed is buying mortgage backed securities. In other words: the Fed is buying real estate.
  - amiga_500 6y ago
    Because much of the "value" presently seen is speculative, and there are many reasons not to be bullish for the next couple of years.

bananaquant 6y ago

Interesting. This kind of resembles the crisis of 2008, when banks have produced too many subprime loans. It looks like WF tries to get them off their books while it still can. Or at least not make new ones.

loeg 6y ago
Not in any way does this resemble 2008. WF is not originating new loans because essentially all consumers suddenly have terrible looking credit and WF doesn't want to take on that risk.
- imtringued 6y ago
  Consumers have normal looking credit because the credit scores are lagging behind. It's smart to wait until the credit scores actually reflect reality instead of showing a rosy picture right before everyone starts defaulting at the same time.
  - loeg 6y ago
    I think we agree but I was less clear than I could have been in the grandparent comment. When I say "consumers suddenly have terrible looking credit," I don't mean FICO credit scores. Those remain, as you suggest and I agree, mostly unaffected, as they are a lagging indicator. Banks are not fools, however, and they understand that there is more to consumer credit risk than FICO scores, especially in this kind of turmoil and economic contraction.

brianwawok 6y ago

It's also the fun part about credit. When you don't need it, it is real easy to get. When you need it, it is real hard to get. This is why $1 in the bank is worth so much more than $1 in credit that you can maybe draw on. Especially lines of credit that can be called in.

perlpimp 6y ago
I wonder how much bank needs to be hurting to call in a loan / call in your mortgage to try to sell it for a fraction of a price in some unknown distant future.
- coliveira 6y ago
  In some places in the US, not more than 2 or 3 months. That's all they need to start a foreclosure.
- 1stranger 6y ago
  Pretty sure residential mortgages cannot be called. Edit: assuming the borrower is current.
joeax 6y ago
Two years ago someone I know was laid off. After a three-month climb to find a new job, they vowed to put together an emergency fund. After a sudden drop in rates, they took out a small cash-out refinance. Luckily they still have a job, but the fact that they now have that cushion puts their mind at ease. Lesson learned: take advantage of cheap credit while you can.
- duxup 6y ago
  That seems like more of a roll of the dice.... If they're capable of paying back that refinance ... probably could have just saved. I suppose there is a little window of time where it is advantageous if they're laid off again, that seems more like random chance.
  - deleted 6y ago

ben_jones 6y ago

My parents took out a home equity loan in 2013 and are still buried by it, any recommendations here for how they can best service or refinance the loan?

Consultant32452 6y ago
Wait until their house is worth less than the debt. Hide their assets, bail on the house, declare bankruptcy.
- scarface74 6y ago
  This is actually a great idea. I walked away from five underwater mortgages in 2012. I paid $1000 on a second loan during a short sale and paid 1/3 of the difference between what I owed on one after the sale. The other three I paid nothing. Three years to the day after the last short sale, we bought a brand new build in a much better area of the city with 5% down on a custom build. No bankruptcy required.
- brenden2 6y ago
  People are downvoting you, but this is actually not a bad idea. People have been brainwashed into believing they should 1) forever be indebted and 2) always carry the burden of debt. As the saying goes: If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.
  - elliekelly 6y ago
    Banks have done an excellent job of selling the American public on the idea that creditworthiness somehow equals morality. This same advice given to a corporation would be considered by many as just what the business has to do to weather the storm.
    - brenden2 6y ago
      Well said. Profile checks out.

bdavis__ 6y ago

would you loan money into this kind of uncertainty? i think this is a very rational decision for a bank to take. (hate for the banks aside, i would do the same thing..)

jklein11 6y ago
For the right kind of rate and with the right collateral, you bet I would.
- throwphoton 6y ago
  For home loans, the collateral is the house, which is strange because the house doesn't truly belong to the borrower until the loan is paid off. Deeper still, the conditions where home loans are risky are the same conditions where home prices are risky. In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K. I'm not sure the "right collateral" even exists for home loans, it's a weird case where the "collateral" is the item being purchased on credit instead of something the borrower actually has.
  - usrusr 6y ago
    Chances are the house will be worth ten millions, but those ten millions won't be much after the global corona compensation money printing spree and the 1.x million the borrower pays will be worth nothing. The borrower being forced to walk away would be a best case outcome for the bank in a high inflation scenario.
  - loeg 6y ago
    Banks generally don't extend HELOCs beyond a borrower's equity in the house, which is the fractional value of the house the borrower truly owns. They are basically a flexible cash-out second mortgage. > In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K. You've just described ordinary mortgage risk, in no-recourse states. In recourse states, the bank can go after the borrower for the remaining balance of the loan ($600k). Generally if a bank was willing to lend $1 million to someone, they had reasonably high credit and cash flow at origination time (debt-to-income ratio, non-conventional jumbo loan). They may not get their $600k back, and in no-recourse states they will get $0 back, but that is priced in to the interest rate of the loan.

jacurtis 6y ago

The significance of this announcement (and why I am assuming OP posted it), is not to let us know that we can't get home equity lines, but instead showing it as a signal that one of the largest mortgage providers in the world is worried about future home/land values. Remember that Wells Fargo is the 26th largest corporation in the world. They have plenty of money. They have lots of smart people (insert your "stupid banker" joke here) working for them. They have lots of highly-paid analysts that make these decisions. These are not spur-of-the-moment, panic-induced decisions. Wells Fargo also has a lot of experience with home values and mortgages, by being the largest Home Mortgage provider in the US (by dollar value), with $126B in home loans [1]. Long story short, they are experienced in home values and mortgages and they have a lot riding on them. They have smart people that have looked at the current and future state of home values and decided, that despite the potential revenue that could be generated from Home Equity Lines, there is too much risk in offering this product and they will stop offering it until further notice. That's a big deal. Wells Fargo is leaving lots of money on the table by NOT offering these. But their analysts have decided that it is too risky. That to me, means that there is a lot of concern over future home value. We have been living in a housing bubble for a while. We all know it, Wells Fargo knew it, and this could be a signal that at least Wells Fargo is concerned that the bubble might be popping. (I personally hate Wells Fargo, but did have a Home Mortgage through them until about 3 months ago when I sold my last home. I wouldn't borrow from them again however. This isn't a fanboy piece, but it is important to acknowledge their strengths when looking at signals like this). [1] - https://www.housingwire.com/articles/41539-here-are-the-top-10-lenders-dominating-the-mortgage-market/ https://www.housingwire.com/articles/41539-here-are-the-top-...

tempsy 6y ago
It’s because the government is only buying mortgage backed securities right now for conventional residential loans that don’t include HELOCs which the bank would shoulder all the credit risk for. If the government is guaranteeing one type of residential real estate loan and not the other it makes no sense for a bank to offer the one that isn’t guaranteed when they can just pursue practically risk free lending.
- 6y ago

sigstoat 6y ago

there are alternatives to believing that the value of the entire housing market is going to drop: 1. your last N years of work/credit history are currently less predictive about future income/repayment ability than banks would like. regardless of who you are. 2. even if the same amount of money continues to chase the housing market, there is (as some other comments mention) at least a little bit of a reason to believe that the money might want to move to different geographic areas. if you don't know what that change will look like, your ability to predict future home values is reduced.

lalsdjsdlafsdk 6y ago

This is what happens when you allow fascists like Gavin Newsom to run wild. FUCK OFF AND DIE FASCIST SCUM! COVID IS A LIBERAL LIE!

heyflyguy 6y ago

Sure there is market uncertainty, but that changes qualification criteria not the willingness to lend. I wonder if this announcement has more to do with the PPP fiasco in the banking world. I applied for an SBA loan the day before the PPP was released and my bank said basically "sorry, we're doing nothing but PPP for the next 5 weeks".

toast0 6y ago

How much of this is market forces in general, and how much of it is market forces combined with Wells Fargo's balance sheet limits that it has because of past misdeeds.

omgJustTest 6y ago

While this seems drastic, consider JP Morgan did this in April [1]. I couldnt find statistics on the number of loans oustanding or the number that have drawn lines of credit. Let me know if you can. [1] https://www.americanbanker.com/news/jpmorgan-halts-home-equity-loans-due-to-coronavirus https://www.americanbanker.com/news/jpmorgan-halts-home-equi...

skybrian 6y ago

Well, that's unfortunate but understandable. It seems like the Fed should be buying up home equity loans, to offload the risk? A universal basic income would be best, but short of that, more consumer loans would be useful. And better if they only need to be paid back when you're making money.

aazaa 6y ago

This follows a similar move by JP Morgan Chase: > Due to the economic uncertainty created by COVID-19, we’re temporarily not accepting applications for new home equity lines of credit (HELOC). This will protect both you and the bank. https://www.chase.com/content/chase-ux/en/personal/home-equity/update https://www.chase.com/content/chase-ux/en/personal/home-equi... From Wikipedia: > A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. HELOC funds can be borrowed during the "draw period" (typically 5 to 25 years). ... https://en.wikipedia.org/wiki/Home_equity_line_of_credit https://en.wikipedia.org/wiki/Home_equity_line_of_credit This has two main implications: 1. Two major banks are now worried about consumer solvency (and/or real estate prices) to the degree that they're forgoing HELOC origination profits across the board. An alternative response could have been to simply raise interest rates on these loans. The fact that the loans were suspended suggests a lot more afoot than meets the eye. Those suggesting to "cash-out refi instead" may be surprised to find in the coming weeks that these loans have also been terminated, or saddled with terms that make them unattractive. 2. Consumers who were planning to tap home equity to pay for monthly expenses will not be able to do so. This could spell a lot of trouble moving forward. US consumers view their homes as a kind of ATM, dispensing dollars on demand through HELOCs. That money can be used for literally anything. Without an easy source of credit to tap, where will the American consumer turn? In increasing order of existential risk: 1. Sale of big-ticket property (houses, boats, cars, cutting short college degrees). 2. Credit cards 3. Payday loans 4. Default on other loans 5. Bankruptcy protection These options magnify bad decisions made in the past. Selling big-ticket items drives down the market price of the underlying assets, which leads to more distress, and so on. Credit cards and payday loans charge indefensibly-high interest rates that can easily lead consumers further down the ladder of insolvency. Bankruptcy filings destroy money by wiping loans off the balance sheets of banks. Banks respond by tightening lending standards, which drives the cycle further down. How will employers likely respond? 1. Hiring freezes 2. Pay cuts (nominal or real, through increased employee contributions to health care plans) 3. Bankruptcy All of these things, from stress on consumers to pressure on businesses, are deflationary. Expect the value of cash to increase compared to the value of stuff. How to approach what lies ahead? If you're in debt, get out now. Then stay out. Deflation wipes out debtors as they're forced to pay back loans with ever-appreciating dollars.